How Indexed Universal Life’s Growth Helps Retirement
Updated October 2026 · by John “Hutch” Hutchinson, ChFC®, CLU®, AEP®
Indexed universal life (IUL) helps a retirement plan in two distinct ways, and neither one requires beating the market. First, it upgrades your risk-off money: the same $100,000 block that limps to about $119,000 at 1% compounds to roughly $240,000 at 5% over the same study window. Second, it breaks the 4-percent-rule trap — in a down year you draw from the policy, which contractually cannot go negative, and leave your portfolio alone to heal. Where it fits in your allocation, what the floor-and-cap trade really costs, and how the borrowing works are all below.
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Inefficiently placed assets
Simulating market movements
Borrowing to buy the dips
The 4 percent rule
Risk-Off Assets and Risk-On Assets in the Same Allocation
Whatever someone’s asset of choice happens to be, the pattern is usually the same. They hold a certain amount of risk-off money and a certain amount of risk-on money. The risk-off side is most often cash. Sometimes it’s bonds — which aren’t truly risk-off, there’s real risk in them, but they get treated as the stable bucket anyway.
The point of keeping that less volatile money around is so you can go swing for your highest rate of return somewhere else: the stock market, mutual funds, real estate, your own business. The trade is that the risk-on side comes with a lot more fluctuation and a lot less liquidity than the stable side does. The argument on this page is simple: a max-funded IUL can be the safe-money bucket that bonds and CDs were supposed to be — and haven’t been — and risk-off should never have to mean yield-off.
What Inefficiently Placed Assets Actually Cost You
Most people are carrying a certain amount of money that is simply parked inefficiently. Take a $100,000 block of assets and grow it at 1%. Over an 18-year study period, that block doesn’t even reach $120,000 — and a full 1% after tax is hard to come by in risk-off assets to begin with.
Now run the same $100,000 block over that same window at 5% steady compounding. That’s not a claim about how IUL itself moves — we get to the actual market movements in a moment — it’s just the power of compounding on the same money.
At 5% you end up with more than double what the 1% block produced: roughly $240,000 instead of about $119,000. You started with $100,000, so that’s an extra $140,000 for making no other change than where the money sat.
If you’re researching how insurance works as an asset class, my guess is you’re tired of getting no growth — tired of the idea that safety, liquidity and stability have to be bought by giving up growth. It doesn’t have to be an either-or conversation.
Once you understand how life insurance actually works, you can get steady growth and keep those other qualities, along with a few additional benefits worth walking through.
Simulating Real Market Movements With an IUL Floor and Cap
Steady compounding makes a nice illustration, but nobody’s risk-on money moves in a straight line. So let’s rebuild the same comparison using real market averages instead: one column tracking the actual S&P 500, the other tracking the same period with IUL constraints applied on top of it.
The window I used runs from 1999 through 2016, and I picked it because it’s bookended by good times — it opens with a 19% year and closes after a strong run. That’s the raw market return. Then I ran the identical stretch through a 0% floor and a 12.5% cap, which is a pretty standard set of IUL terms.
You can find higher floors than that — a 1% floor exists — and higher caps in the 13%, sometimes 13.5% range. But run the standard 0-and-12.5 version and lay the two side by side and here’s what happens.
That first year earns 19% in the market, so $100,000 becomes $119,000 — while the capped side is limited to its ceiling. Then the market dips for three straight years while the policy’s growth simply goes flat instead of going negative. When the market rebounds, it’s rebounding from a hole. The policy never lost its place in line, so it’s sitting substantially higher than the raw portfolio.
Then 2008 hits, the portfolio takes a violent drop, and the policy goes flat again. The market grows steeply after that — and because the policy never had to spend years climbing back to even, it’s off to the races from a higher starting point.
There is a real advantage to buffering against that volatility with a floor. There’s also a real cost: you give up upside, and in the biggest run-ups the uncapped market climbs faster than the capped policy does. That’s the deal, and it’s an honest one either way.
Having money that’s safe and liquid isn’t as linear a trade-off as the investment community would have you believe — the argument that a higher long-term rate of return automatically settles the question. And on their own terms I agree with them: stretch this out 30 or 40 years and the market side probably does win on rate of return alone. Rate of return alone isn’t the whole decision.
The Best Deals Show Up at the Bottom — Borrowing to Buy the Dips
Which brings up the other half of the argument. The best deals you’re ever going to get show up at the bottom of a downturn — in the stock market, in real estate, on equipment, on business inventory, on buying another business outright. You don’t have to catch the dead bottom either. Buy on the way down or wait for things to stabilize and you’re still buying better than you were at the top.
The problem is where the money comes from. What you do not want to do is cash out your stocks while they’re down in order to buy those other assets. That locks in the loss and takes the money out of the rebound. It’s the classic spend-or-hold dilemma: hold the asset and it does nothing for you today; sell it and it does nothing for you tomorrow.
Now suppose instead you could contractually borrow against your IUL policy while the full balance kept compounding for you and never lost its place in line. Borrow is a dirty word to a lot of people, but that arrangement is a serious advantage, because you get to double dip.
You keep all the growth your IUL was entitled to, and you separately put that borrowed money to work in an asset where you often have far more knowledge and control than you do in a mutual fund. That second return stacks on top of the growth rate you’re already earning inside the policy.
It’s genuinely hard to do that anywhere else. Borrowing against a retirement plan runs into hard limits. Borrowing against a taxable stock portfolio brings margin-call risk, which means you can lose on both sides at once. The contractual floor inside an IUL, and the fact that the carrier locks it in, takes a lot of that risk off the table.
IUL in a Retirement Distribution Scenario: The 4 Percent Rule
Growth is one thing. What IUL does to a retirement distribution scenario is another, and for that it’s worth borrowing the mutual fund industry’s own research.
A mutual fund company put together an analysis meant to prove the 4 percent rule. If you haven’t run into it before, the rule says that as long as you never withdraw more than 4% of your retirement portfolio in any given year, you end up better off than if you’d withdrawn at 5%, 6%, 7% or 8%. Take those higher rates and you run a real risk of running out of money before you run out of breath.
The higher the withdrawal rate, the more you’re playing chicken with your own life expectancy. Their setup: a $1 million portfolio that starts taking withdrawals at age 65, backtested from December 1972 through December 2002 — a genuinely bad stretch to retire into.
At 4% the portfolio survived the barrage. Above that it didn’t, and the reason is that withdrawing during a down market is a double negative. You’re redeeming more shares to produce the same income — more still, once inflation raises what “the same income” costs — and once those shares are gone they can’t participate in the rebound.
Simple numbers. At 5%, you take $50,000 out of that $1 million in year one. The next year the market is down, so producing the same $50,000 means redeeming more shares than you did before. And it’s worse than that: at a 4% inflation rate, matching what last year’s $50,000 actually bought you takes $52,000. You can see how that spiral gets away from you once you’re drawing more than 4%.
All of that, though, assumes the very linear picture the investment community paints. Left to them, you keep every dollar under their management, you never draw more than 4% — and there’s a version of the argument that says low interest rates make it the 3 percent rule — and they manage your money in perpetuity while you scrape the crumbs off the top every year.
Choosing Where You Draw From in a Down Year
Be strategic about where your assets sit and where you draw from, and that corner isn’t the only room you have. Fund an IUL policy well and you’re no longer painted into a single 4% or 3% withdrawal rate — you get to pick and choose which bucket a given year’s income comes out of.
In a down year you can decide not to touch the portfolio at all. Leave the stocks, bonds and mutual funds alone and let them heal and rebound.
Your IUL wouldn’t be earning any index credit that year either, but it isn’t losing ground to the market: indexed universal life always carries a zero percent floor, and sometimes a 1 percent floor. That year’s 0% is less the fees, which can be minimized by proper design. So that’s where the year’s income comes from — either as withdrawals or as loans.
Plenty of people hear loan or borrow and see red. But there’s often an advantage to using loans instead of withdrawals, because you don’t want to kill the goose that’s going to keep laying golden eggs for you. There will be more fluctuations and more downturns after this one.
Take generous loans against the policy, let your market-based assets recover, and the policy keeps stair-stepping upward through the whole thing. You can’t time the market, but borrowing against an IUL lets you stay fully invested in those stair steps while you spend the money. Nobody knows how long a downturn is going to run, and this way you don’t miss the ride.
Then, once the market does come back, you turn it around: redeem fewer shares than you would have needed at the bottom and use them to pay the loans back and make the policy whole — now that those shares have had their chance to heal.
The Banking Strategy Is Still in Play During Retirement
And don’t forget that the banking strategy is still in play after you retire. Some of the best opportunities are the small corrections everyone else is afraid of, and of course the major ones where everything is selling at a deep discount.
If you’re well positioned in an IUL policy, there’d be no love lost in a stretch like that. You still participate fully in the growth inside the policy, and you can still borrow against it to buy real estate, put money into your own business, or move on whatever your asset class of choice happens to be.
A lot of my clients are very successful entrepreneurs. Most of them already have enough money that they don’t need to keep working, and they keep working anyway — entrepreneurs are wired to see an opportunity and pounce on it. It’s just how they’re built.
You don’t have to give that up in retirement. With IUL you keep participating in the policy’s growth while still being able to act on the unusual, time-sensitive opportunity when it shows up.
Where to Go From Here
If the borrowing piece is still what makes you cringe, start with one of our flagship videos at BankingTruths.com/basics-branch. It’s six minutes and it shows you exactly how policy loans work.
You can also subscribe to our channel on YouTube to get alerted when we publish new videos — there will certainly be more.
And when you’re ready to see this on your own numbers: a generic backtest can’t tell you what your accumulation and distribution path looks like — that takes your age, your buckets, and your actual income needs. Click here to schedule a call with us and we’ll model it with you.
BankingTruths.com is John “Hutch” Hutchinson’s independent education and brokerage platform, not a captive agency tied to one carrier. Educational only. Indexed Universal Life policies involve fees, caps, participation rates, spreads, policy charges, and loan risk. Index credits are not guaranteed. Policy loans and withdrawals may reduce cash value and death benefit, may cause the policy to lapse, and may create taxable income if not managed properly. This analysis represents the author’s professional opinion based on 19 years of experience and should not be considered tailored financial advice for your personal situation. Consult your tax, legal, and financial professionals before implementing any strategy.